UniCredit Bank Austria climate protection analysis 2021:
The benefits and costs of the necessary CO2 levies in Austria
- Climate targets unachievable without more stringent measures and more comprehensive pricing of greenhouse gas emissions
- Greenhouse gas emissions fell by 7.7% in 2020 in the wake of the pandemic but are expected to rise again in 2021 as the economy rapidly recovers
- Achieving climate neutrality in Austria by 2040 will require emissions reductions of at least 10% per year over the next 20 years — i.e. reductions will need to outstrip those seen during the crisis situation of 2020
- Climate protection targets are a particular challenge when it comes to transportation and buildings
- Private households generate around 15 million tonnes of greenhouse gas emissions and will bear the brunt of CO2-related costs — easing that burden is on the agenda at a national level and via the EU's Social Climate Fund
If Austria is to achieve its current climate protection targets, in particular the aim of being climate neutral by 2040, considerable investment is still required and greater pricing on the use of harmful petrol and diesel will be required. The stricter European climate legislation proposed in July of this year as part of the EU Commission's "Fit for 55" package does give some cause for optimism here. The plan is for Europe to become the world's first climate-neutral continent by 2050.
The new target of reducing greenhouse gas emissions by 55% by 2030 (compared with the 1990 figure) means that the pace of action to combat climate change will need to almost double from the benchmark set previously. But the real crux of the matter is how to implement effective climate protection measures at both EU and national level. "Right now, the "Fit for 55" package is just a series of proposals, some of which (such as energy taxation) will actually require unanimity within the Council. This means that many of the measures will not be introduced before 2023, and even then it will likely be in a diluted form. Most significantly, sustainable energy taxation at EU level remains dependent on national measures", says UniCredit Bank Austria Economist Günter Wolf.
Climate neutrality by 2040 depends upon Austria reducing emissions by more than 10% per year
It was primarily the pandemic-induced drop in energy consumption in the transportation and industrial sectors that prompted a 7.7% decline (to 74 million tonnes) in greenhouse gas emissions in 2020 in Austria. These reductions are likely to be largely offset again in 2021 as the economy rapidly recovers. This trend illustrates that the mechanisms for achieving reductions as set out in the current Austrian climate protection legislation will need to be supplemented and made more stringent — not only to protect the climate but also to prevent high subsequent costs if the European targets are missed.
If Austria is to achieve the "Fit for 55" target, greenhouse gas emissions in those sectors that are not involved in emissions trading will need to fall from the 47 million tonnes emitted in 2020 to below 30 million tonnes by 2030. It will be much more difficult to become climate neutral by 2040. For this to happen, emissions would have to be reduced by an average of at least 10% per year over the next 20 years; this is more than the drop seen during the crisis situation of 2020.
Even assuming that the target is achieved, in 2040 there will still be around six million tonnes of greenhouse gases to be absorbed into carbon sinks. According to forecasts from Environmental Agency Austria, however, CO2 emissions in Austria will actually be reduced simply through the climate protection measures that have already been agreed — from 4.6 million tonnes in 2019 to below 2 million tonnes in 2040. The EU target of making agriculture and forestry within the European Community climate neutral from 2035 onwards is quite unrealistic for Austria, not least because afforestation possibilities are limited in a densely wooded country.
Targets in the "Fit for 55" package and potential problems achieving them
The emissions reduction targets for the sectors involved in the EU Emissions Trading System will be increased by more than half from 2023 onwards. Plants will be expected to emit 61% fewer greenhouse gases in 2030 than they did in 2005. In order to achieve this target, emissions will have to fall by at least 4–5% per year over the next few years. For context: Up to 2020, Austrian companies within the system succeeded in reducing their emissions by less than 2% per year, to around 27 million tonnes.
The new targets are particularly challenging for steel manufacturers and the cement industry, and not just because they are responsible for the majority of industrial emissions (in Austria, a total of around 17 million tonnes). The more serious issue is the fact that although both of these sectors may be able to reduce some of their emissions by using renewable energy sources and more-energy-efficient production methods, some of the procedures pertaining to process-related emissions are still at the research stage.
Around two thirds of all emissions in Austria, equating to 47 million tonnes in 2020, are not covered by the EU Emissions Trading System. Most of this comes from the combustion of fuels in the transportation sector (around 21 million tonnes) and from fuels used for heating and cooling buildings (around 8 million tonnes). In order to make the 2030 reduction targets more achievable, the "Fit for 55" package proposes establishing a new emissions trading system for buildings and road transport from 2025.
Regardless of whether the price signalling in this area comes from an emissions trading system or from national CO2 levies, state measures will also be needed to support the decarbonisation of these areas — to expand the charging infrastructure and promote emission-free vehicles, for instance, or for building renovations.
Climate protection measures in this area focus primarily on delivering thermal rehabilitation of housing stock, which is something that can only be achieved with a significant boost to funding. Switching to more-efficient, lower-emission heating systems also makes a contribution and should accelerate CO2 pricing.
Transport plays a crucial role
"In view of the growing freight transport capacity, people's considerable mobility requirements and the dominance of fossil fuels in vehicle drive trains, creating a transport sector that is as free as possible of emissions is probably the biggest challenge facing climate protection efforts", says Wolf. Even if the transition to a largely electrified fleet is successful and the required volume of electricity can be provided, just changing to electric motors will certainly not be enough to keep transportation emissions as free as possible from emissions. In order to increase the attractiveness of low-emission transportation in Austria in a meaningful way, not only would the public transport offering have to be considerably expanded but significantly higher fuel prices would also be necessary.
The speed with which households and businesses will switch to low-emission transportation or heating systems depends not only on the total costs but also on the trends in the relative prices of the energy sources. In terms of energy content, electricity is currently significantly more expensive than other energy sources in Austria due to network charges and the green electricity levy. For example: In 2020, the cost of a kilowatt-hour of electrical energy for an average household was 22 euro cents (based on consumption of 2500 to 5000 kilowatt-hours). By comparison, households had to pay 6.5 euro cents per kilowatt-hour for natural gas and 5.7 euro cents for heating oil, and even the cost of diesel was only 10.6 euro cents. It is not just regulatory measures such as mandatory replacement of oil heating that are needed in order to make more climate-friendly fuels more attractive; a change in the pricing ratios for the energy sources is also necessary.
Cost burden on private households from higher energy prices
The increased use of energy sources that are less harmful to the environment and the attempt to internalise the external costs of climate-damaging energy sources inevitably generate economic adjustment costs, which in turn lead to rising energy prices. While emissions from major industrial companies and the energy sector have long been priced under the EU Emissions Trading System, it is only in the coming years that households, commercial operations and the services sector will be confronted directly with these rising climate costs.
It is anticipated that households will have to bear a disproportionately high share of the CO2 costs — this is because, firstly, companies will pass on costs to customers where possible; and secondly, households are responsible for a disproportionally significant amount of emissions. In total, some 15 million tonnes of greenhouse gas emissions can be attributed directly to private households in Austria. A little over half of this volume stems from transportation services, which for households mostly relates to personal motorised transportation.
The burden on the "average household" in Austria would also remain moderate if there were a CO2 levy of EUR 50 per tonne of fuel. In this scenario, the cost of one litre of diesel would increase by 15 euro cents if there were to be no change in the mineral oil tax rate. The additional costs are barely above the average fluctuation range seen for diesel prices in recent years. Based on consumption of 1300 litres of diesel per year and a price of EUR 1.1 per litre, the total cost would increase by EUR 160, or 11%.
Given the limited price elasticity for fuel demand, a CO2 levy of EUR 50 per tonne would also be unlikely to lead to any significant changes in terms of the transportation choices of households. By contrast, a CO2 price of EUR 50 per tonne for heating oil and natural gas would significantly increase the energy bills of an "average household" — by 15% and 22% respectively (based on the average energy prices in 2020). This would equate to an increase in natural gas costs of 1.2 euro cents per kilowatt-hour, while the cost of heating oil would increase by 16 euro cents per litre.
The EU Social Climate Fund was conceived with a view to cushioning private households and small businesses from the financial pressure caused by higher energy prices and by the need to invest in more-energy-efficient heating and cooling systems, thermal insulation and clean mobility. The fund is expected to distribute around EUR 72 billion from the EU budget between 2025 and 2032, with Austria set to receive around EUR 644 million of this amount. The other Member States should also have access to the same amount. The fund is likely to be increased, and additional measures will also be required at national level to protect lower-income households from the burden of rising costs.
Enquiries
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, tel. +43 (0) 50505 - 41954;
Email: Guenter.wolf@unicreditgroup.at